Don’t let yourself be fooled by the overwhelming approval of the new Egyptian constitution in the referendum held earlier this week. While, according to preliminary results, the vast majority of roughly 37 percent of Egyptians who showed up at the polls backed the proposal, very little about the document itself or about the process through which it has come about is consistent with the idea of liberal democracy and limited government. Yesterday’s Bloomberg View editorial summarizes all one needs to know about the new constitution:
The armed forces would for at least the next eight years be independent of civilian control, including over their budget, as they were under former President Hosni Mubarak, himself an air force commander. Military courts would remain autonomous and would have jurisdiction over civilians in many instances. The hated police would also get greater independence, while the Supreme Court would be able to decide its size and membership for itself.
Neither should there be any illusions about the events leading to the adoption of the document. The referendum followed months of a deliberate crackdown on the opposition and disbanding of the largest political force in the country – not to speak of the arrests of activists of the ‘no’ campaign.
In short, Egypt seems to be coming full circle to where it was before the events of the Arab Spring, particularly if General Abdel Fattah el-Sisi announces his candidature for the country’s highest office. The question is how long the Egyptians are willing to put up with it.
As a side note, the constitutional process in Tunisia looks much more encouraging, although as Emmanuel Martin and I argue here, the new constitution is unlikely to be a an impetus for the badly needed economic reforms.
If you think that Western welfare states are in a pickle, imagine what they would look like if, instead of transferring money, governments tried to help people by giving all of them free or cheap stuff. One does not need to be an economist to see the inefficiency of in-kind transfers, but many countries use redistribution of stuff – typically in the form of commodity subsidies – as the main tool of redistribution and social assistance.
In Egypt, the government subsidizes the prices of fuels and certain food products at artificially low levels. Obviously, the wealthy – who can afford to consume more of the subsidized commodities – are the largest beneficiaries of the subsidy system. In urban areas of Egypt, for example, the top quintile of the income distribution receives eight times as much in energy subsidies as the bottom quintile.
As I argue in a new Cato Policy Analysis published today, commodity subsidies are behind Egypt’s fiscal meltdown – the country is currently running a deficit of 15 percent of GDP, while being kept afloat only by the inflow of funds from the Gulf countries. To avert a looming fiscal catastrophe, Egyptian policymakers need to act now. The paper, which I also summarize here, provides a list of recommendations about how the reform should be approached:
Firstly, [the reform] will have to be quick and complete – unlike the partial adjustments that were made to subsidy programmes in the past. Every failed reform attempt causes Egyptian rulers to lose some of their credibility. If yet another partial reform is tried, people will simply refuse to take it seriously and instead demand, perhaps in a violent way, the preservation of the status quo.
Secondly, a successful reform will have to come as a part of a broader package of structural reforms. Egypt’s energy markets are marked by heavy government involvement and lack of competition. Simultaneously, the patterns of Egyptian food prices display strong downward rigidities, with domestic prices not falling even when international prices do. That is a sign of uncompetitive, inflexible markets.
Thirdly, it is unreasonable to expect Egyptians to buy into the subsidy reform if the government does not commit to sharing its benefits with the population. Such commitment can take the form of cash transfers that would replace the existing commodity subsidies. After all, the enormous size of subsidy spending creates large opportunities for fiscal savings and for fairly generous payments to those in need. The government could essentially save half of its subsidy spending and still be able to pay every Egyptian household a sum of $373 annually. Or, with a basic system of means-testing in place, it could pay the poorest 40 per cent of households $933 every year while still spending only one half of what it currently spends on subsidies. That may sound modest, but Egypt’s GDP per capita is only slightly above $3,000, and one quarter of the country’s population is living on less than $37 a month.
You can download my new policy analysis here.
Four months after the military takeover in Egypt, the country’s economy is still a train wreck. With growth well below government forecasts, the budget deficit in 2013/2014 may get to 15 percent of GDP, bringing Egypt into truly dangerous territory, unless the inflow of aid from the Gulf countries continues indefinitely. And instead of reforms, there are discussions of a new stimulus plan, worth $3.6 billion.
Nor are there many reasons for optimism in the political arena. Mohamed Morsi appeared in court on Monday, charged with inciting violence and murder. If convicted, he can face the death penalty. Unsurprisingly, the trial, alongside with the ongoing crackdown on the Muslim Brotherhood, has fostered further violent protests in Cairo.
However, if instead of following the news, one listened to U.S. officials, one could not avoid the impression that everything is going swimmingly. Today’s Washington Post has a brilliant editorial describing the state of denial in the administration:
Not surprisingly, a Freedom House report released Monday concludes that “there has been virtually no substantive progress toward democracy ... since the July 3 coup,” despite the military regime’s supposed “road map.” But that’s not how Secretary of State John F. Kerry sees it. “The road map is being carried out to the best of our perception,” he pronounced during a quick trip to Cairo on Sunday. A liberal constitution and elections? “All of that is, in fact, moving down the road map in the direction that everybody has been hoping for.”
A large part of the Egyptian problem is that the U.S. government is convinced that continued support to Egypt’s generals serves American interests in the region and will contribute to political and economic stability in the country—which is why the administration is keen, to use Mr. Kerry’s words, to “restore the full measure of the relationship that existed previously.”
The idea that U.S. support for the military—however inept and power-hungry it may be—serves American interests is misguided. The only thing that the unscrupulous political and financial commitment to the autocratic elite in Egypt achieves is that it harms the Egyptian people, fuels anti-American sentiments in the region, and erodes any moral high ground the United States might have once occupied.
Three months since the military coup in Egypt, U.S. military aid to the country is being reconsidered. It appears that the administration will
withhold the delivery of several big-ticket items, including Apache attack helicopters, Harpoon missiles, M1-A1 tank parts and F-16 warplanes, as well as $260 million for the general Egyptian budget.
The details of the freeze have not been disclosed. But after its refusal to call the events in Egypt a coup and a half-hearted cancellation of joint military exercises scheduled for September, this is certainly a step in the right direction. Unfortunately, it is too small and too equivocal as the administration is stressing that it wants to keep a door open to restore the aid in its entirety. More importantly, the announcement comes too late to make a meaningful difference to Egyptians.
Why all the reluctance? For years, Americans were told that aid to Egypt was a mechanism that gave the U.S. government leverage over developments in the most populous Arab country. The only sense in which that has worked is that aid has helped to deeply entrench authoritarian rule in the country. Egypt’s military has slowly built an opaque economic empire and a network of patronage with very little accountability. And even if one believes that a strong military and an autocratic secular state is what it takes to save Egypt from becoming a theocracy, there is nothing for Americans to gain from being complicit in the process and in everything that might possibly go wrong.
Indeed, many things have already gone wrong. The bloody aftermath of the coup might be just a foretaste of more violence looming on the horizon. Following the crackdown on the Muslim Brotherhood, Egypt has seen a rise in Islamic radicalization, especially in the Sinai. In the meantime, the secular government has shown itself no more capable of tackling the country’s numerous economic challenges than the thoroughly inept cabinet of Hisham Qandil. And as American money keeps flowing in, ordinary Egyptians will keep blaming the United States for the rebirth of the militarized authoritarian state in their country and for its ugly repercussions.
Syria: On September 27th, the United Nations Security Council unanimously adopted a resolution outlining the details of the turn over and dismantlement of Syria’s chemical weapons. Syria’s president, Bashar al-Assad, has stated that his government will abide by last week’s UN resolution calling for the country’s chemical weapons to be destroyed.
It appears that this news was well received by the people of Syria. The black-market exchange rate for the Syrian pound (SYP) has dropped from 206 per U.S. dollar on September 25th to 168 on September 30th. That's a whopping 22.6% appreciation in the pound against the dollar. Currently, the implied annual inflation rate in Syria sits at 133 percent, down from a rate of 185 percent on September 25th.
Iran: Since President Rouhani took office, Iranian expectations about the nation's economy have turned positive. Over the past month we have seen a significant decrease in the volatility of the Iranian rial on the black market. This trend of stability has continued into this week, as President Rouhani’s trip to the UN has raised hopes of constructive cooperation with the West. In consequence, the rial has remained virtually unchanged on the black market, moving from 30,500 per U.S. dollar on September 25th to 30,200 on September 30th. The implied inflation rate in Iran as of September 30th stands at 8%, down from 23% on September 25th.
Venezuela: While the crises in the Middle East are easing, the troubles in Venezuela are far from over. The black market exchange rate for the Venezuelan bolivar has fallen from 44.03 per U.S. dollar on September 24th to 40.92 on September 30th. This represents an appreciation of 7.6% over the last week. The implied annual inflation rate as of September 30th sits at 255%, down from a local high of 292% on September 17th. The ConocoPhillips dispute, a massive blackout, and worsening shortages caused by price controls have ravaged the Venezuelans’ confidence in the bolivar over the month of September.
Although the bolivar has rebounded modestly in recent weeks, this simply indicates that the economic outlook in Venezuela is only slightly less miserable than it was in mid-September. The economy is still on a slippery slope and economic expectations continue to be weighed down by the fragile political atmosphere, worsening shortages, and the ever-present specter of political violence. An inflation rate of 255% is nothing to celebrate.
Argentina: The black market exchange rate for the Argentine peso has held steady at around 9.5 per U.S. dollar since September 25th, with a 9.55 exchange rate on September 30th. That represents a 2.9% decrease in the value of the currency from the September 22nd rate of 9.27. The implied annual inflation rate as of September 30th sits at 54%, a decrease from the rate of 49% on September 22nd.
Egypt: The black market rate for the Egyptian pound has held steady at around 7.1 per U.S. dollar since September 25th, roughly the same level as the official exchange rate. This indicates that, for the time being, the military has brought some semblance of stability to the Egyptian economy. As of September 30th, the black market exchange rate was 7.12. The implied annual inflation rate as of September 30th sits at 19%.
For up-to-date information on these countries and their troubled currencies, see the Troubled Currencies Project.
Iran: Prior to Hassan Rouhani’s election as Iran’s new president in June, the black-market Iranian rial to U.S dollar (IRR/USD) exchange rate stood at 36150, implying an annual inflation rate of 109 percent (June 15th 2013). Since Rouhani took office, Iranian expectations about the economy have turned positive, or at least less negative, and the black-market IRR/USD exchange rate has strengthened to 29200. In consequence, the implied annual inflation rate has fallen like a stone, and currently sits at 20 percent. That’s even lower than the most recent official annual inflation rate of 35.1 percent. (August 2013).
Rouhani has stated that one of his top priorities is to set the Iranian economy right. So far, it appears the new president has delivered the goods.
Venezuela: September got off to a rocky start in Venezuela. On September 4th, the World Bank's International Center for the Settlement of Investments Disputes announced that Venezuela had illegally expropriated ConocoPhillips's multi-billion dollar crude oil projects. This coincided with a massive blackout that left half the country without power. To top it off, price controls have led to worsening shortages, with the government announcing on September 13th that the shortage index had hit a whopping 20 percent for the month of August. All of this bad news is reflected in Venezuelan’s economic expectations, as measured by the black-market exchange rate for the Venezuelan bolivar (VEF).
From beginning of the month through September 17th the VEF/USD exchange rate depreciated by 16.3 percent, from 37.32 to 44.59. In consequence, the implied annual inflation rate rose from 230 percent to a high of 292 percent.
Things took a turn for the positive on September 18th, when Venezuela and China agreed to a $14 billion investment package, which includes joint venture to develop the Junin 10 bloc of the Orinoco Oil Belt, as well as investments in mining, transportation and agricultural projects in Venezuela. In consequence, the black-market VEF/USD exchange rate has fallen to 44.03, yielding an annual implied inflation rate of 261 percent.
Argentina: Despite some recent good economic news, Argentineans still appear to be skeptical about their economy’s future. On Friday, September 20, Argentina announced a strong 8.3 percent year-over-year growth rate for Q2. One would think this strong performance would have improved Argentinean’s expectations for the economy, as measured by changes in the peso’s black-market U.S. dollar exchange rate. But, the black-market exchange rate has held steady in the days since the announcement. The current black-market ARS/USD exchange rate sits 9.43, yielding an implied annual inflation rate of 50 percent. It appears that concerns of ongoing inflation troubles are still weighing heavy on the minds of Argentineans.
Egypt: Since the Egyptian military ousted Mohammed Morsi on July 3rd, the Egyptian pound’s (EGP) official and black-market U.S. dollar exchange rates have converged. Currently, the black-market rate sits at 7.10 EGP/USD – very close to the official exchange rate of 6.89 EGP/USD. These rates have been stable for the past month.
Prior to the military takeover, the black-market exchange rate sat at 7.6 EGP/USD. Since Morsi’s ouster, the pound has appreciated by 7 percent, to 7.10 EGP/USD. This yields a current implied annual inflation rate of 18 percent, down from 28 percent in the final days of the Morsi government.
Yes, it appears the Egyptian generals have delivered some semblance of stability on the economic front. Indeed, the black market for foreign exchange has all but disappeared.
Syria: As President Obama heads to the United Nations General Assembly to iron out the terms of a tentative Syrian chemical weapons deal, the black-market exchange rate for the Syrian pound (SYP) continues to hold steady at 206. Currently, the implied annual inflation rate in Syria sits at 189 percent. This is down from a high of 291 percent on the 28th of August, when Secretary of State John Kerry kicked off the United States' abortive march to war.
For up-to-date information on these countries and their troubled currencies, see the Troubled Currencies Project.
With today’s ruling by the ‘Cairo Court for Urgent Matters’, banning the activities of the Muslim Brotherhood and ordering a confiscation of its assets by the government, the Egyptian regime is taking the crackdown against its political opponents to the next level. While it is unclear what the decision means for the future of the Brotherhood’s political arm, the Freedom and Justice Party, the government has committed itself to disbanding an organization which counts between 300,000 and 1 million members and which has been in existence since 1928.
That is unlikely to work. The Brotherhood was banned during Nasser’s presidency. In Syria, Brotherhood membership was a capital offence between 1980 and 2011. If anything, these and similar bans strengthened the organization’s narrative of victimhood and enabled it to reemerge strengthened and relying on broader popular support. In a recent paper, I show that the electoral success of the Muslim Brotherhood in the aftermath of Arab Spring was foreseeable and resulted from the fact that the group had been actively involved in the provision of social services, particularly to poorer segments of the Egyptian population, and possessed a well-recognized brand name. Over time, this electoral advantage would have dissipated, particularly as the Brethren proved to be rather inept policymakers.
Alas, with the crackdown on the organization, the current leadership of the country seems to be determined to drive the organization underground and to radicalize it. At this moment, Alan Krueger’s characterization of terrorism sounds as an ominous warning of what is to come unless the Egyptian military relinquishes its grip to power:
[t]errorists and their organizations seek to make a political statement; terrorists arise when there are severe political grievances with no alternatives for pursing those grievances.